Tuesday, May 08, 2007

ECB proposes oversight framework for card schemes

Finextra reports that the European Central Bank is proposing to establish a new oversight framework to oversee all card payment schemes operating in the euro zone. And the ECB starts a consultation on their work.

Interestingly, Finextra is incorrect to call this a legal framework, because the European Central Bank has no legislatory power over retail payments. Of course the ECB claims in the document that it has such power:Under Article 105(2) of the Treaty establishing the European Community and Articles 3 and 22 of the Statute of the European System of Central Banks and of the European Central Bank (ECB), one of the basic tasks of the Eurosystem is to promote the smooth operation of payment systems. In this context, the ECB’s policy statement in 2000 clarified the role of the Eurosystem in the field of payment systems oversight. In particular, the policy statement states that “The Eurosystem may also formulate policy concerning the security of payment instruments in order to maintain the confidence of the users of the payment systems”.

But we should not forget the primary role of the ECB: monitor and ensure a stable interest rate in Europe and operate a gross-settlement system to effect open market operations. It is for this purpose of this specific whole-sale gross settlement/payment (via TARGET, to become TARGET2) that the ECB has been granted the powers to ensure a smooth operation of payment systems. It has never had the role or goal assigned to regulate retail payments.

This is a classic example of institutional drift. Central banks just sit together and find that they are responsible for retail payments as well. And then start making up stuff like security requirements for e-money. Or requirements for recycling bank notes which are then suddenly also applicable to retailers and banks all around. A bit too far a stretch.

So now the European central banks find themselves responsible for level playing field and maintaining confidence in card networks. They dug up the usual requirements (lamfalussy: legal issues, transparency, operational reliability, governance and clearing and settlement) that are usually applied to gross settlement systems and now rephrased them for cards. Without asking themselves if it might not be possible that market players already have a bunch of scheme requirements in place.

Each card scheme will then be expected to make sure that information - including data on financial risks - is available to all parties involved in the payment, and to ensure "an adequate degree of security, operational reliability and business continuity". Card companies will also be required to implement effective, accountable and transparent governance arrangements and manage and contain financial risks in relation to clearing and settlement processes. Companies providing credit and debit cards in the euro zone, including pre-paid card and gift card schemes, whill be expected to comply with the new rules. But the framework will not apply to card providers that have issued fewer that one million cards a year over the past three years. Companies that have recorded less than EUR1 billion in annual average transactions over the past three years will also be exempt, as will non-card e-money providers.

Well, quite an interesting move of the central banks. The ink of the Payment Service Directive isn't dry or they publish a bit of draft-regulation of their own which is not agreed by the European parliament and only bound to raise cost and prices in the sector. My guess is that that isn't the proper way forward for any European institution. If you are not satisfied with the rules that EP and Council drafted, you shouldn't try to make up some of your own.